analysis of puerto rico working group restructuring counterproposal 6-27-16

Bonistas Del Patio Assumptions and Conclusions

(The Working Group For The Fiscal and Economic Recovery of Puerto Rico, Dated April 11, 2016)

Puerto Rico Restructuring Counterproposal

Prepared by Stewart Simon, Ph.D.Beacon Lights Research & Advisory, LLC

June 27, 2016


2

Puerto Rico is Unique

2

Puerto Rico is not a ‘Commonwealth’ or a ‘State’, but a

self governing ‘Territory’

Do not pay federal income taxes

(with the exception of Social Security and Medicare)

Puerto Residents are U.S. citizens

Cannot file for Ch. 9 under the

Federal Bankruptcy Code

Cannot vote for U.S. President

Historically investors

attracted to triple tax-exemption of

bonds


3

Bonistas Del Patio

Self-funded organization formed to represent the interests of local bondholders

Chaired by Executive Director Jorge Irizarry, the former President of the GDB

Estimated that about $14 billion or 20% of the Commonwealth’s debt held locally

Much of it invested in General Obligation (GO), guaranteed, COFINA sales-taxed backed as well as other securities


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Debt and Fiscal Crisis

4

Puerto Rico faces unprecedented debt and financial crisis of great magnitude

The time to develop and implement concrete solutions is quickly running out

Defaulted on $400 million of GDB bond payments due May 1, 2016

$2 billion in debt payments due July 1, 2016 including General Obligation (GO) and certain guaranteed-debt

Island spends over a third of its tax revenue on debt payments, an amount hardly sustainable

.


5

The Problem

5

.

Puerto Rico faces a number of problems that are daunting as it struggles to address current and long-term debt and fiscal problems

Prolonged Recession

High Debt Levels

Rising Unemployment

Declining Business

Population loss


6

Local Bondholders Require Representation

General Obligation and guaranteed bonds enjoy a priority of payment over other creditors under the Commonwealth’s Constitution

PROMESA plan provides GO debt service may be restructured regardless of its Constitutional first priority over other government expenditures

Bond payments represent a significant portion of current income and retirement savings

BDP seeks meaningful role in the debt restructuring negotiations now underway


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BDP Plan

Seeks 100% repayment of Constitutionally guaranteed debt

Sit at negotiating table representing its members

Five-year moratorium on principal payments

Interest continues to be paid as scheduled

Bondholders receive 5% coupon on maturing debt

BDP strongly urges that the government continue to pay interest on its GO, guaranteed, COFINA as well as other bonds with no ‘haircuts’ in principal


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CONCLUSIONS

• BDP’s restructuring plan appears reasonable given the importance of protecting Island residents from income losses

• The five-year principal moratorium for GO, Guaranteed, COFINA, as well as bonds provides time to fully implement remedial actions

• Sufficient resources should be available to make scheduled interest payments on GO, guaranteed, and COFINA bond payments

• BDP plan elegant in its simplicity in contrast to other plans that are complex and difficult executions

• It is an imperative that the groups represented by BDP gain a seat at the table in the negotiation of fair and equitable remedial actions


9

BDP Assumptions

BDP has developed a repayment structure to

preserve interest payments due its members while

allowing the government the

time to restructure its

debt

Under its proposal, general

obligation principal

payments would be postponed

over the next five years while paying a 5% coupon on

maturing bonds

Based on the data provided, there

should be sufficient

revenues to cover required general obligation and

other debt payments

BDP hopeful that the U.S. Congress

will enact legislation in a

timely manner in order to give

Puerto Rico the tools it needs to restructure its

debt


10

BDP: Facts, Goals, and Vision

In the near-term, Puerto Rico’s fiscal crisis is one of liquidity (cash), which hampers its ability to meet its obligations in a timely

manner

The Government Development Bank missed a $399 million debt payment on May 1, 2016

and faces the real possibility of an even larger default on July 1, 2016 on $2 billion of

debt, of which, $800 million is for general obligation bonds

Investors range from large institutional investors to individual retirees whose

salaries are invested in Commonwealth bonds as part of their individual retirement

plans

Approximately 25% of all Government debt is held by local Puerto Rican investors and

institutions


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BDP: Facts, Goals, and Vision, Cont.

Local bondholders have been mostly absent throughout remediation and negotiation

efforts

BDP is concerned that Island residents, as opposed to non-residents, will be taxed to repay all the debt, which until now has had

no representation

BDP seeks to protect the rights of local investors by seeking 100% repayment of

Constitutionally guaranteed debt

BDP finds it absolutely necessary to gain a seat at the negotiating table representing

its members collectively


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Supporting Data and Materials

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Puerto Rico Is Unique

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It is not a state, but a territory of the United States, a complex relationship to say the least

It cannot file for Chapter 9 under of the Federal Bankruptcy code

States cannot file for bankruptcy, but they can authorize local governments to file under Chapter 9


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Credit Profile

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Socio-economic indicators well below average Chronic budget deficits Protracted economic weakness and population loss Worsening financial and liquidity crisis ‘One-Shots’ including deficit financing used to close gaps High debt levels and retirement liabilities Bond ratings well below investment grade


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Economic Malaise

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Prolonged economic downturn: Entered ‘Great Recession’ earlier than nation; still struggling to recover

Population: Estimated 3.47 million in 2015, down 334,000 from 2000 – a 9% decline.

Income Per Capita: 35% of U.S. average Unemployment Rate: 11.7% (April 2016) Underground Economy: Estimated at 25%-30% of total

GDP


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Government Development Bank for Puerto Rico (GDB)

Children's Trust

Employees Retirement System of the Government of the Commonwealth of Puerto Rico and its I nstrumentalities (ERS)

Puerto Rico Aqueduct and Sewer Authority (PRASA)

Puerto Rico Convention Center District Authority (PRCCDA)

Puerto Rico Electric Power Authority (PREPA)

Puerto Rico Highways & Transportation Authority (PRHTA)

Puerto Rico Housing Finance Authority (PRHFA)

Puerto Rico Industrial Development Company (PRI DCO)

Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financing Authority (AFI CA)

Puerto Rico Infrastructure Financing Authority (PRI FA)

Puerto Rico Municipal Finance Agency (MFA)

Puerto Rico Public Buildings Authority (PBA)

Puerto Rico Public Finance Corporation (PFC)

Puerto Rico Sales Tax Financing Corporation (COFI NA)

University of Puerto Rico (UPR)

Debt Agencies & Acronyms

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Excess/Shortage Calculations FY2016 FY2017 FY2018 FY2019 FY2020 TotalRevenues 16,257$ 16,399$ 16,809$ 17,009$ 17,114$ 83,588$ Non Interest Expenditures 15,769 16,044 16,636 17,405 17,556 83,410

Interest 2,320 2,370 2,320 2,239 2,170 11,419

Principal 1,810 1,044 957 1,628 1,299 6,738

Total Debt Service 4,130 3,414 3,277 3,867 3,469 18,157

Gross Financing Requirements (3,642)$ (3,059)$ (3,104)$ (4,263)$ (3,911)$ (17,979)$ Estimates After Measures (3,205)$ (3,002)$ (1,383)$ (1,827)$ (735)$ (10,152)$

Principal Payments By Bond Type-Issuer FY2016 FY2017 FY2018 FY2019 FY2020 TotalGO 426 371 327 383 439 1,946 COF SR - - - - 3 3 COF SUB 38 19 48 80 96 281 PBA 86 91 66 70 74 387 POB - - - - - - GDB 19 487 318 892 434 2,151 PFC 29 30 32 33 34 159 PRIFA 44 45 48 49 52 237 PRHTFA 123 128 134 150 155 689 PR INDUSTRIAL 8 7 7 11 11 45 Totals 774 1,179 979 1,668 1,298 5,898

Surplus (Shortage after Principal Deferment) (2,431) (1,823) (404) (159) 563 (4,254) IVA Projected Increase in Revenues 1,121 1,121 1,121 1,121 1,121 5,605

Surplus/(Shortage) After Addtl Revenue Not Projected) (1,310) (702) 717 962 1,684 1,351 Sources: Puerto Rico Fiscal and Economic Growth Plan

GDB Working Group Projections


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Debt Schedules By Major IssuerYears 1 - 5 Totals: 2016 - 2020

Note: Excludes Children’s Trust, University of Puerto Rico, Convention Center, & PRIDCO as amount outstanding accounts for only 3% of outstanding debt; PREPA excluded already as it has tentative deal with its Bondholders under a forbearance agreement.

Bond Type Principal Interest CompoundedInterest

BABsSubsidy

DebtService

COF SR 3,405,000 1,030,774,251 0 0 1,034,179,251COF SUB 280,535,000 2,098,881,652 0 -18,899,618 2,360,517,035GDB 2,150,582,000 546,369,736 0 -22,429,614 2,674,522,122GO 1,946,052,456 3,207,941,657 78,652,544 0 5,232,646,657PBA 387,050,000 976,081,275 0 -174,707,753 1,188,423,522PFC 158,545,000 245,702,296 0 0 404,247,296POB 0 763,212,038 0 0 763,212,038PR INDUSTRIAL 45,310,159 34,171,135 6,024,841 0 85,506,135PRHTA 688,978,556 1,011,498,489 60,226,444 0 1,760,703,489

PRIFA 237,180,000 360,971,569 0 0 598,151,569

Total 5,897,638,171 10,275,604,099 144,903,829 -216,036,985 16,102,109,114


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GO5 Year Debt Service

General Obligation BondsSecured by the full faith and credit and taxing power of Commonwealth

Years Principal Interest CompoundedInterest

BABsSubsidy

DebtService

Interest on Principal Deferral

Excess (Shortage)

After Interest Payment

2016 0 370,149,749

22,699,898 0

818,489,749 - 0

2017 0 735,039,736

23,523,500 0

753,599,311 18,559,575 753,599,311)

2018 0 716,279,929

24,260,140 0

732,630,672 16,350,743 (732,630,672)

2019 0 700,398,701

8,169,007 0

719,569,750 19,171,050 (719,569,750)

2020 0 680,724,911 0 0

702,664,161 21,939,250 (702,664,161)

Total 0 3,202,593,026

78,652,544 0

3,726,953,644

76,020,618 (2,908,463,895)

Source: GDB Working Group, BDP, and other publically available resources


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COFINA Seniors

COFINA SUBs

COFINA Total

Year Principal Interest Due Debt Service

Projected Revenue

Excess/(Shortage)

Year Principal Interest Due Debt Service

Projected Revenue

Excess/(Shortage)

Year Principal Interest Due Projected Revenue

Excess/(Shortage)

2016 0 10,603,329 10,603,329 0 0 2016 0 4,763,725 4,763,725 0 0 2016 0 15,367,054 696,000,000 0

2017 0 226,704,649 226,704,649 0 0 2017 38,295,000 447,585,234 485,880,234 0 0 2017 38,295,000 674,289,883 724,000,000 15,615,032

2018 0 226,704,649 226,704,649 0 0 2018 18,745,000 466,885,571 485,630,571 0 0 2018 18,745,000 693,590,220 753,000,000 44,864,696

2019 0 226,704,649 226,704,649 0 0 2019 47,950,000 465,885,571 513,835,571 0 0 2019 47,950,000 692,590,220 783,000,000 47,207,270

2020 0 226,704,649 226,704,649 0 0 2020 79,765,000 470,525,393 550,290,393 0 0 2020 79,765,000 697,230,042 815,000,000 42,204,873

Total 917,421,925

917,421,925 0 0 Total 184,755,0

001,855,645,494 2,040,400,494 0 0 Total 184,755,0

002,773,067,4

193,771,000,0

00149,891,8

71

COFINA5-Year Debt Service

Puerto Rico Sales Tax Financing AuthoritySecured by all sales tax collections received by the

Authority and/or Trustee

Source: GDB Working Group, BDP, and other publically available resources


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Snapshot

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Commonwealth: Self-governing, autonomous territory of U.S.

Population:3.7 million (Larger than Connecticut and Iowa)

GDP Per Capita: $16,300 (82nd in world)

Land Area: 3,515 square miles (Larger than Rhode Island)

Capital: San Juan

Approximately 40% of its population below the poverty

lineUnemployment rate

11.7% compared to national 5.0 %

(Mar 2015)


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Credit Ratings

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analysis of puerto rico working group restructuring counterproposal 6-27-16

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